LAWRIE WILLIAMS: Gold bounces back but silver still disappoints - for now

Well it took a couple of days of price consolidation following the July 4th public holiday in the U.S. but both the gold and silver prices have bounced upwards - the former quite strongly - after a couple of days when they had appeared to be under pressure.  What has to be particularly encouraging for gold investors was that the increase was primarily in the U.S. markets which so often seem to dampen prior gains in Asia and Europe.  Silver’s rise so far has been disappointing for the white metal investors, but gold’s week-end close of around $1,415 is encouraging and looks like it could be pre-empting a further move higher next week as the next FOMC meeting draws closer.

At the moment the Fed is expected to reduce interest rates by 25 basis points at the FOMC meeting and recent statements from Fed chairman, Jerome Powell, would seem to support that assessment,  The odds on such an increase are now put at close to m100% by the CME’s Fed Watch tool in the U,S, and the possibility of a 50 basis point cut are now put at 25% - up from around 4% a week earlier.  Needless to say, should the Fed reduce rates by 50 basis points that would be hugely bullish for gold - and might even awaken silver out of its torpor - but more on silver later!  Of course if the Fed defies expectations and keeps interest rates unchanged at its end-of month meeting we could see a big knock-back in precious metals prices, but given Powell’s recent statements we see this scenario as unlikely.  With the European Central Bank also indicating it will increase fiscal stimulus - as Martin Murenbeeld’s excellent Gold Monitor weekly newsletter puts it “Bottom Line: monetary policy around the world is set to favor gold.”

The Gold Monitor also takes a look at the Economist magazine’s Big Mac Index which compares the price of a McDonald’s Big Mac hamburger in over 50 countries around the world as an indicator of the over- or under- valuation of the U.S. dollar.  In only one country - Switzerland - is a Big Mac more expensive than in the USA and in many key competitive currencies to the U.S. dollar the latter looks to be hugely overvalued.  In Russia for example a Big Mac costs 64.5% less than in the U.S, and in China around 47% less.  While there are almost certainly other factors at play here, the overall conclusion id the the u.S. dollar is hugely overvalued against competitor currencies which, in turn will have had a severely depressing effect on the gold price in U.S dollar terms.  As my colleague, Ross Norman, pointed out in a recent article, gold was actually at, or close to, an all-time high in around 72 currencies back in January this year when the U.S. dollar price was around $1,290!.  It is probably so in even more countries ta a US$1,415 price!

So - is the dollar overvalued?  President Trump feels it is.  Will the dollar index come down?  Perhaps over time.  If so that would be gold price beneficial, but is unlikely to be of immediate effect.

But what of Silver? It has risen in price but not as fast as gold, which is defying historical precedent - so far.  Indeed the Gold:Silver Ratio (GSR) is at around its highest level for over 25 years and a high GSR denotes underperformance by silver.  In the past sharp increases in the gold price tend to be accompanied by even sharper rises in silver - but not this time around!

The big question is therefore, is investor perception of silver as ‘gold on steroids’ no longer the case, or are we seeing a re-rating.  Perhaps a mixture of the two.

Silver investors have been burnt in the past, and there could also be increased recognition that silver is, like the pgms, more of an industrial metal (60-70% of silver demand is industrial in nature nowadays).  With the world looking as though it could be moving into recession, there have to be doubts about the strength of likely industrial demand.  We do suspect, however, that if gold continues to rise then the GSR will come down - even if only a little, which would mean that silver could be a more profitable investment than gold at current levels.  At a GSR of around 93, as it is at present, we see an insignificant downside risk in silver and with many respected commentators and analysts recommending an investment in silver at this level there could well be a decent boost in the silver price ahead.  We shall see, but it should be remembered that the silver price tends to be far more volatile than that of gold - which can work both ways. The silver price is still lower than it was at the beginning of the current year, but the odds on it staying so lacklustre seem to be diminishing by the day - particularly if gold moves onwards and upwards as we expect.

13 Jul 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com